Does Smart Routing Matter?
9 Pages Posted: 21 May 2019
Date Written: August 18, 2010
Abstract
We compare the performance of broker smart routers separately for non-marketable and marketable orders. For non-marketable orders, smart routers that “naively” route to maximize liquidity rebates perform significantly worse than those routing to maximize fill rates. The difference between the best and worst broker smart router is about 10% of the bid-ask spread (0.4 basis points) on average for large cap stocks and 6% of the spread (0.9 basis points) on average for small cap stocks, a significant difference for cost-sensitive traders. We also find that the best brokers perform well across all liquidity groups. For marketable orders, however, smart router performance generally does not vary significantly across brokers.
Keywords: Algorithmic Trading, Smart Routing, Reg NMS, Limit Orders
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